Euro remains under market pressure

The uncertainty over the outcome of the discussions on Kosovo meant the euro remained under pressure on currency markets yesterday. From its overnight level of $1.03, it fell to a new trading low of $1.0260 before recovering to trade in a narrow range either side of $1.03. At the close, the euro was on $1.0280. Dealers said the currency might yet test further lows against the dollar, particularly if the impasse in negotiations on a withdrawal of Serbian forces from Kosovo becomes protracted. Some dealers felt the euro's recovery to a trading level at or around last Friday's closing level was a positive sign and that fears of a plunge to parity against the dollar might be overdone.

A round number like parity holds a special magic for the foreign exchanges, where psychology can be as important as economics, and dealers are anxious to get there after driving the euro to lows within three cents of the target yesterday.

But few see a break below $1 as the death knell for the euro's credibility, given it was only four years ago that the currently invincible dollar was plumbing record lows against the deutschmark and other European currencies, and post-second-World-War troughs against the yen.

"Sentiment is clearly getting dreadful for the euro but even if it does get below parity it will not be there for very long," said Mr Jim O'Neill, chief currency economist at Goldman Sachs in London, who expects it to be at $1.09 in three months and $1.16 in six.

"In a strange way, the euro's biggest problem is that people are not particularly short of it, and if Europe's economy and politicians could ever provide some good news, it would find it easy to recover."

European currency and debt market traders are using bad news on the Kosovo war as a reason to sell, but have failed to buy on the back of any good news.

The euro, the asset most sensitive to Kosovo ups and downs, went up by only a fraction against the dollar last week after Yugoslavia accepted the international peace plan, but failed to sustain gains above $1.04.

The conflict has been frequently blamed for falls in the euro and in euro zone debt markets since NATO started its air war on March 24th. Stock markets have largely shrugged it off.

But last week's peace agreement helped only briefly to reverse the trend that is firmly rooted in poor European economic data compared with the US, analysts said. Meanwhile, Mr Ernst Welteke, who takes over as president of the Bundesbank in September, said he expected a more favourable exchange rate for the euro against the dollar once economic recovery got under way in Europe and the war came to an end. Mr Welteke said that the current euro weakness was of only limited concern for the German economy, because the largest part of business was conducted within the euro area.

Mr Welteke rejected any idea that the stability criteria within currency union would be softened. Italy had been allowed to overshoot its deficit targets this year because it had been hit harder by the war in Kosovo than other European countries, he argued.

But even with a deficit ratio of 2.4 per cent of gross domestic product, Italy was still within the 3 per cent maximum allowed by the Maastricht Treaty, Mr Welteke said.

However, a survey published in Welt am Sonntag on Sunday showed 59 per cent of Germans are convinced the euro will be a weak currency, up from 28 per cent in January.